A Day Made a Difference in This Purchase and Sale Agreement

Co-author Derek Younkers *

And what a difference it was! In Apache Corp. v. Apollo Expl. LLC et al, Apache and others acquired an oil and gas lease on 100,000+ acres in the Texas Panhandle. The primary term was three years. The effective date was January 1, 2007, “from which date the anniversary dates of this Lease shall be computed”.  Extension beyond the primary term required a producing well and the creation of three blocks of equal acreage from which the lessees would drill wells to a combined depth of 20,000 feet per block per year.

The parties recorded a Memorandum of Lease in the public records. The Memorandum recited that it was “subject to other provisions of the Lease” and “the Primary Term thereof expires on the 31^st day of December 2009.”

The other lessees sold 75% of their working interest to Apache by a series of substantially identical purchase-and-sale agreements. Section 2.5 granted each Seller a back-in working interest for up to one-third of the interests it conveyed to Apache once the wells reached “Two Hundred Percent … of Project Payout.”

Section 4.1 required Apache to offer “all of [its] interest in the affected Leases (or parts thereof) to Seller at no cost to Seller” should Apache’s drilling commitment for the year result in the loss or release of any of the leases.

In 2014, Apache bought lessee Gunn’s remaining interest of the leases and its PSA rights.

In 2015, Apache failed to drill 20,000 feet in the North Block of the lease.

The question for the Court: Did the North Block expire on December 31, 2015, or January 1, 2016?  The day the North Block expired determined whether Apache breached the contract by failing to offer the lease back to Sellers or had until the end of 2016 to drill the 20,000 feet.

The Sellers sued for breach of contract and declaratory relief. Apache filed four motions for summary judgment asking the Court to rule that:

(1) Apache complied with § 4.1;

(2) § 2.5’s 200% provision meant that Apache had to reach a 2:1 return on investment before Sellers could exercise their back-in option;

(3) the North Block expired on January 1, 2016; and

(4) § 4.1 required Apache to only offer back each Seller’s original interest, not all of the interests.

The Court applied the common-law default rule for describing time when parties use the words “from” or “after.” Under the rule, the date from or after a period is to be measured is excluded in calculating time periods. Thus, a period of years ends on the anniversary of the measuring date, not the day before. No language in the lease manifested a clear intent to displace the rule.

The Memorandum stipulated the lease would expire on December 31, 2009, but by its terms the Memorandum was subordinate to the lease. The lease was not ambiguous, so the Court ignored extrinsic evidence of the December date and found the primary term ended on January 1. Thus, the North Block expired on January 1, 2016.

The Court found that Section 4.1 only required Apache to offer back to each seller its original interest. A contrary interpretation would require Apache to offer each seller 100% of the same interests. (The court of appeal decision focused more on this issue.)

Finally, Section 2.5 meant a 2:1 ratio of profits to expenses. The Sellers’ argument that they could back in when profits equaled expenses would render the 200% language meaningless.

The Court remanded the case for further proceedings.

Your musical interlude.

* Derek is a rising 2-L at Baylor Law School and a Gray Reed summer associate.

 

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